TAX REFORM PROVISIONS MODIFY LIMITATIONS ON NET OPERATING LOSS CARRYFORWARDS FOLLOWING AN 'OWNERSHIP CHANGE'

Rev. Rul. 86-133

Sections 382 and 383 of the Internal Revenue Code were amended by section 621(a) and (b) of the Tax Reform Act of 1986 (the Act), Pub. L. No. 99-514, 100 Stat. * * *. Following an "ownership change" as defined in section 382(g), sections 382 and 383 annually limit the amount of a corporation's (1) taxable income that can be offset by certain of its net operating loss (NOL) carryforwards and by other tax attributes, and (2) income tax liability that can be offset by other tax attributes. The NOL carryforwards and other tax attributes to which limit applies are those that were available prior to the ownership change. This annual limitation is called "the section 382 limitation."

Section 382(b)(1) defines the section 382 limitation for any tax year ending after an ownership change as, in general, an amount equal to (A) the value of the stock of the corporation immediately prior to the ownership change, multiplied by (B) the long-term tax-exempt rate. Section 382(f)(1) provides that the long-term tax-exempt rate shall be the highest of the adjusted federal long-term rates in effect for any month in the three-calendar-month period ending with the calendar month in which the ownership change occurs. Section 382(f)(2) defines the term "adjusted federal long-term rate" as the federal long-term rate determined under section 1274(d), except that (A) paragraphs (2) and (3) thereof shall not apply, and (B) such rate shall be properly adjusted for differences between rates on long-term taxable and tax- exempt obligations. The Conference Report for the Act indicates that the adjusted federal long-term rate is to be computed as the yield on a diversified pool of prime, general obligation tax-exempt bonds with remaining periods to maturity of more than nine years. 2 H.R. Rep. No. 99-841 (Conf. Rep.), 99th Cong., 2d Sess. II-188 (1986).

Section 621(f) of the Act provides that the amendments made by section 621(a) and (b), in general, shall apply to any ownership change following (A) an owner shift involving a 5-percent shareholder, occurring after December 31, 1986, or (B) an equity structure shift occurring pursuant to a plan of reorganization adopted after December 31, 1986.

The adjusted federal long-term rate for the purpose of determining the long-term tax-exempt rate under section 382 is 6.41 percent for November 1986. This monthly rate is calculated in the same manner as the adjusted applicable federal rates for purposes of section 1288 are calculated.

To determine the long-term tax-exempt rate for purposes of section 382(b)(1)(B) of the Code for ownership changes that occur during January 1987, taxpayers must compare the adjusted federal long- term rates for November 1986, December 1986, and January 1987. The highest of these three adjusted federal long-term rates is the long- term tax-exempt rate for January 1987.

Each month, pursuant to section 1274(d), the Internal Revenue Service publishes a revenue ruling containing the applicable federal rates, including the federal long-term rates. In the future, the adjusted federal long-term rate for purposes of section 382 will also be published monthly in that revenue ruling. This monthly publication, starting with the rates for January 1987, also will specify the long- term tax-exempt rate for ownership changes that occur during that month (that is the highest of the adjusted federal long-term rates for that month and the prior two months).